[chumali]

Clearly there are equilibrium effects here which would stop the extreme scenario you describe from arising.

As the proportion of active investors in the market falls, those that remain enjoy a greater advantage. There will therefore always be some minimum threshold of actively managed assets (due to the marginal returns from active management eventually exceeding the marginal fees).

It's an open question as to what this threshold might be, but it will certainly be orders of magnitude above what you describe.

[OscarCunningham]

Where would those returns for active investors come from? They're still playing a zero-sum game amongst themselves.

[skybrian]

Seems like it's more complicated than that? Index funds do buy and sell sometimes, as some investors move money into and out of index funds. There are also dividends and stock buybacks.